Laws, Mental Models & Common Sayings

September 30, 2012

Poor Charlie's Almanack Rules

Charlie Munger says the most important part of investing & life in general is to have a variety of mental models which you can rely on to make a sound judgement call.

This helps us avoid being swayed by emotion, mob mentality & other diversions to making the correct decision.

Munger apparently has around 100 models from many different fields (math, science, philosophy, psychology, etc) which help him make important decisions.

The following are some of the most common laws, mental models & common sayings I’ve encountered. I’m just going to quickly summarize each of the ideas, you can pick and choose the ones you want to further research on your own. There’s more to it than what I’m explaining here.

updated: 10.04.12

1. Hindsight is 20/20 – it’s often hard to know what is going on in the current moment until some time has passed and we can fully reflect. Everyone is an “expert” in hindsight. The true expert makes sound judgements in the present moment. ie: During the internet boom, Warren Buffett famously stayed away from investing in tech companies. His reason was simple. His #1 rule is to invest in things he can understand. He admitted that he did not understand technology. He suffered a lot of ridicule as tech stocks went wild during the boom. When the stock market finally crashed after the bubble burst, many lost all their money while Buffett was still chugging along nicely. It’s easy to recognize the internet bubble after it has crashed, in hindsight. Anyone can do that. That does us no good.

2. Road to hell is paved with good intentions – Bad things aren’t necessarily done by bad intentioned people. A lot of times, people try to make the best decision for themselves or their family but the end result is terrible. Perfect example is the tv show Breaking Bad. A mild mannered high school chemistry teacher learns he has cancer. He wants to make as much money as he can to leave for his family and each good intentioned decision leads to a road to hell.

3. A picture is worth a thousand words – complex ideas can often be better conveyed with one simple image.

4. A 1001 words is worth more than a picture – a spoof said by John McCarthy, a computer scientist. Interesting play on #3. Fun to think about.

5. The seven year itch – It is said that married couples tend to get the urge to cheat around the seven year mark. This saying reminds us that the novelty of fresh love, lust & romance will eventually wear off and keeping the relationship in tact will require actual discipline & work.

6. Lollapalooza effect – famous mental model by Charlie Munger. This is when a bunch of different mental models, biases, etc work together to lead us to make a poor decision. The example he gives is of tupperware parties where all your buttons are pressed so that you make a purchase. Read more here.

7. Reciprocity – from one of the all time best books, Influence, by Professor of Psychology & Marketing Robert Cialdini. Humans are socially programmed to be fair & to return favors. Examples include free samples at the mall causing a spike in purchases. The hari krishnas used to forcefully hand out plastic flowers to passerbys at airports and this caused a spike in donations – even though the person receiving the flower didn’t want it and often threw it out in the garbage. The hari krishnans would then go around collecting these discarded flowers to reuse on others. Another example is in the Godfather where the mobsters do a small favor for you – then later on come back asking you to do a much bigger favor as repayment. So beware when someone does you a favor, gives you something for free, lends you something, or even gives you a compliment. They may be playing on your natural instincts of reciprocity.

8. Commitment & Consistency – via Robert Cialdini. This is another human tendency to follow thru if you’ve already made a commitment, no matter how small. Car salesmen may suddenly raise the price towards the end of a sale after you’ve made the decision to purchase. Beware of answering “yes” to seemingly small requests or questions because savvy salespeople will use your instinct to stay consistent to your answer later on when they demand something bigger from you. It is a common trick to ask you a series of simple questions to which you will say “yes” then later on ask you for something bigger and you will automatically agree since you’ve already agreed to previous things. You will automatically want to be consistent.

9. Social Proof – via Robert Cialdini. Humans are programmed to use certain shortcuts and one of them is to do things we see other people doing.

I constantly buy things from Amazon bestseller lists – the idea being if others are buying this, then it must be good. Same thing with positive reviews on Yelp. If we see a long line at one restaurant vs no line at another – we may instinctively assume the long line restaurant must be better.

People can pray on this by faking reviews, best seller lists or hiring people to make it look like there are long lines in front of their stores. Another example is if you have a signup sheet, you should write a few fake names so that the page is not blank. Others who pass by the sheet will be more inclined to sign & give their data (ie: email address) since they see that others have already done the same. This is similar for stuffing a few dollars into your own tip jar so that others will see the money & will feel the urge to tip.

In the pickup community, it is taught that when you’re out looking to meet girls, having other girls around you will increase your social proof. The reason? Women automatically use the mental shortcut: if these women love hanging out around him, he must have good qualities that I will also like. Would you blame the girl? Who would you rather date if you were a girl. A guy hanging out with a group of other guys or a guy hanging out with good looking girls? Some guys take it even further by wearing a wedding ring – this sometimes increases their attraction level from single ladies.

10. Authority – via Robert Cialdini. We are programmed to obey authority figures. A policeman, fireman, doctor, or anyone else who seems to be an authority figure will be able to convince us to do something. We really don’t know if they are a real authority figure or someone hacking our system by pretending to be one.

11. Liking – via Robert Cialdini. We are easily persuaded by people we like. For example, Obama is much more likeable in our country than Mitt Romney – and is likely to win the current election. It is entirely possible that Mitt Romney might be a better president but we will never know. We also trust good looking people more than unattractive people. We, for some reason, project positive features onto good looking people. I know as a male, I automatically think good looking women are also good people. I am surprised to find good looking women who are cheats, robbers, criminals, etc. It boggles my mind every time.

12. Scarcity – via Robert Cialdini. When something is in limited supply, it will cause an urgency to make a purchase. A lot of internet marketers hijack our emotions by creating artificial quantities and dates for when the sales end – even though the item is digital and can be sold at any quantity for any amount of time. Places like QVC have a timer on screen for when the item will not be sold any longer. Sites like Woot & Groupon have limited offers. Some sell limited designed shirts that you cannot buy once sold out. Beware of limited supplies & limited time limits for sales. They are just pushing our buttons using scarcity.

13. Law of Reversed Effort – the idea that the harder we try to do something, the less chance we have of achieving that goal. The harder we try to attract a girl, it can often times backfire & look needy. There is a certain benefit to be aloof and look like you are less interested than the girl is interested in you. This will create curiosity and build massive interest. The harder we try to get the attention of a cat, the more likely it will run away from you. Oftentimes, if you sit there and look uninterested, the cat will slowly come sniffing and will jump on your lap.

14. Law of attraction – The new age belief that everything in the universe is controlled by your thoughts. You can fine tune your mind to attract positive, fun, abundant lifestyle or you can attract negative events into your life. Like attracts like.

15. Parkinsons Law – Work expands so as to fill the time available for its completion. Someone having to work 9-5 will find something to do to fill all that time. All the real work could have been done in an hour or less if everyone was being purely efficient. If you have 3 months to work on a project, most likely, you will be frantically finishing it at the last second.

16. 80/20 Principle (Pareto Principle) – 80% of the results come from 20% of the effort. 80% of the sales come from 20% of your clients. 80% of traffic comes from 20% of your articles. The idea is that very small number of things really make majority of the difference – so focus on that 20%. Read more here.

17. 15 minutes of fame – Coined by Andy Warhol, the idea is that everyone will have their shot at fame for a short amount of time. You may have a short stint as a superstar at your work. Maybe you played above & beyond your skill in a basketball game and gained fame amongst your social circle. Al Bundy had his 15 minutes of fame when he scored 4 touchdowns in one game in highschool – and has been talking about that for the rest of his life. Doesn’t have to be just 15 minutes literally.

18. Investing Temperament – Expect to lose 50% of your portfolio at least 2-3 every 100yrs – Charlie Munger. The idea is to learn from history and have the right temperament when it comes to investing. So when that huge recession does happen, you already were expecting it and you should know that this type of thing only happens very rarely. Don’t lose your cool. Look to buy more. Warren Buffett also further states that out of 10 years, expect 3 down years. That’s just how it’s been on average & how it will be in the future.

19. Be Fearful when others are greedy – and be greedy when others are fearful – Warren Buffett. By the time your neighbors, random strangers and people who have no business investing are getting hyped about a certain market (ie: the internet bubble, the real estate bubble) – it’s time to be afraid. When everyone, including smart people, are fearful – know that they have lost their temperament and it’s time for you to use your cool to become greedy. You will do well.

20. Frameworks for happiness – Perceived control, perceived progress, connectedness, vision/meaning (being part of something bigger than you) – Tony Hsieh. He wrote in his book, Delivering Happiness, that the happiest people on earth master the above four things.

21. ICEE Philosophy – Inspiring, Connective, Entertaining, Educational model to tweet – Tony Hsieh. Tony mentions that tweeting can make you a happier person. His four criteria for every tweet he sends out is for it to fall in one of the above categories. It must be inspiring, connective, entertaining or educational. Read more here.

22. How to treat a woman – “Like a person, then a princess, then a greek goddess, then a person again” – Psych S02E15. This is something the dad told Sean regarding girls. I thought it was really profound, so immediately wrote it down. A lot of guys, including me, approach hot girls like they are hot girls. By doing this, we are putting the hot girls on a pedestal – thus admitting that they are higher status than we are. A big turnoff. No one wants to date below their level. Approach them as if they are just a regular person. Once you have the girl, treat her like a princess (not a slut). Court her & treat her with respect. Then once you are intimate, show your lust and treat her like a greek goddess. After you’re done, treat her like a normal person again.

23. Schrodinger’s Cat – a thought experiment by Austrian physicist Erwin Schrodinger. Using his theory, he proves that a cat is both alive and dead at the same time. Yet when we look inside the box, the cat will either be dead or alive. We will never be to see it as both alive and dead. The idea is that reality can be different than how we see it. Read more here.

24. Allagory of the Cave – the idea by Plato that what we know to be real may be an illusion. Read more here.

25. Blind men & the elephant – the fable where blind men are asked by a king to touch a part of an elephant and to explain what they think it is. Each blind person has a different idea than the other and end up fighting over their theories. One person touches the tail and thinks the elephant is a rope. One person touches the body and proclaims it is a wall. Another touches the leg & claims the elephant is a tree. The idea is that all of us are truly blind to the full reality – we only see a part of it – and we end up fighting each other over it. ie: different religions arguing that they are the correct one. Read more here.

26. Being Humble – “When you’re vulnerable & humble, people like you. When you’re arrogant & an ass, people dislike you” Larry Sanders Show S03E09. After Hank experiences a couple of nights of success as a guest host, he becomes arrogant and mean to everyone. Eventually everyone starts hating him, including the audience – and he fails terribly during one of the show tapings. Then Larry mentions this quote to him as a life lesson. Something everyone (including me) need to keep in mind as we become successful. Be humble.

27. Law of 72 – A tool to estimate the time it takes to double your investment. ie: if you have $100 compounding at an interest rate of 9%, you can expect it to double to $200 by: 72/9 = 8.04yrs. Read more here.

28. Backup/Redundancy – The engineering idea to duplicate critically important items to increase the reliability of your item. ie: If you are backing up your important data, you can backup to an external hard drive in your house and also back up to the cloud. This way, if your house catches fire – it will only take out your computer & the external hard drive – but you will have you data saved off site. This can apply to your life. Always have a backup plan & a backup plan for you backup plan for all super important things. Read more here.

29. Bottlenecks – The idea that a system or process can be limited by one or few parts. You are running a big business but have only one webmaster to make updates to your site. That’s your bottleneck as you will never grow faster than the speed that lone webmaster can work. Eliminate bottlenecks in your life. Read more here.

30. People in glass houses shouldn’t throw stones – Similar to: Let he who is without sin cast the first stone. The idea that we are often critical of others yet we have our own flaws. Sometimes we complain about the neighbors yard when our yard needs work. No human is without fault.

31. Law of extremes – Something I just made up. People who are super skinny tend to be built later. Someone super shy ends up being a public speaker. Someone who is promiscuous later becomes super religious. So if you notice someone who is super successful, motivated and driven – oftentimes they were the exact opposite when growing up. ie: Michael Jordan was turned down from his high school varsity team – and he never forgot that as he became one of the greatest athletes of all time. He was picked on for his defense – so he worked on it and became defensive player of the year. They picked on his jump shots – so he perfected his jump shots & fadeaways. Jordan consistently turned a negative into a positive. We should not assume these masters in our society were born great. The reason I mention this is that if you have a deficiency, you can work on it to make it your proficiency. There is hope. It just takes work.

32. Power of checklists – No matter how smart you are, you need checklists to make critical decisions. The reason is that oftentimes during intense emotional moments, your mind will become cloudy and you will forget everything. Even experienced pilots use checklists for takeoff & landing procedures. Doctors use checklists. Great investors use checklists. Everyone aspiring to be an elite person should use a checklist. I use checklists for presentations, to create a website, to keep my temperament while investing in stocks, and other mundane-seeming tasks. Idea championed by Charlie Munger. There is even a book called The Checklist Manifesto

33. Four laws of creation – by Bashar, the alien channeler. This is esoteric stuff but I’m really into it. Bashar claims there are only four laws to creation: 1. You exist. 2. The One is All & All are One. 3. What you put out is what you get back. 4. Change is the only constant.

34. Four Filters of investing – by Charlie Munger & Warren Buffett. They analyze all their investments using these four rules. 1. Deal in businesses we’re capable of understanding with predictable repeatable cashflows. 2. Business has to have some intrinsic characteristics, should be difficult to replicate, & have a durable competitive advantage. 3. The business must have a management with honesty, integrity & talent. 4. Regardless of how good the business matches the above 3 filters, we will not buy unless it’s for the right price. Read more here.

35. Buy a wonderful business at a fair price than a fair business at a wonderful price – by Warren Buffett. Great businesses are hard to find, will perform well even if you paid a higher price for them, and is infinitely better to own than a fair business.

36. Margin of Safety – by Benjamin Graham + preached by Charlie Munger & Warren Buffett. The idea is to buy a dollars worth of value for 70 cents or less. This gives you a margin of safety in case something goes wrong.

37. Mr. Market – an allegory by Benjamin Graham (preached by Warren Buffett). The idea is to picture the entire stock market as one moody guy named Mr. Market. Some days, he will come to you and offer less for your stocks than they are really worth. Other days, he will come & offer you more money than your stocks are worth. The idea is to explain that the stock market is moody & often irrational. We need to value the business using sound principles and hold strong – do not be swayed by market sentiment. This goes directly against the idea that the market is always efficient – which assumes that you can never beat the market. Obviously that is not the case, as seen by many super investors, including Charlie Munger & Warren Buffett.

38. Compensation – by Ralph Waldo Emerson. The idea is that you should keep working hard regardless of if you get underpaid, cheated or feel unappreciated. The universe works in mysterious ways and Emerson believes that there is a universal bank account with your name on it. For each honest & good deed you perform, your universal bank account gets a deposit in it – and eventually the universe will pay you off. This also explains the idea of luck. Many claim that the harder they work, the luckier they get. Similar idea. Read more here.

39. Can’t teach a fish to fly – this is a variation I like to say to “Can’t teach a fish to sing.” The idea is that a fish is a fish and no matter how much we wish, pray, work, plead – a fish will never fly. Some people we can’t change and we should recognize that and move on rather than waste our efforts on them. Let them be.

40. The Scorpion & the frog – this is similar to #39. The fable of a frog & a scorpion looking to cross a river. The scorpion begs & pleads with the frog to carry him on the frog’s back across the river. The frog refuses, afraid of the scorpion stinging him. The scorpion argues that if he stung the frog, they would both drown – thus there is no point in stinging the frog. Convinced, the frog carries the scorpion on his back across the river. Of course, the scorpion stings the frog midway – and as they are both drowning, the frog asks why he did that. The scorpion responds that he stung him because it’s in his nature to do so. The idea is that some people lie and don’t change their behavior. Don’t trust their words as they will lie & manipulate us even though we know better. Read more here.

41. The Devil is in the Details – the idea that destruction can exist in a small element. ie: In a long confusing contract, there may be a small phrase or even one word that can change the whole context in the other party’s favor. You will lose out big if you don’t pay attention to the smallest of details. The devil hides in the details. Read more here.

42. God is in the details – this is exactly the same thing as above, from a different perspective. God, goodness, safety, etc exists in the smallest of details. Whatever we do, pay attention to ALL of the details. Read more here.

43. Cleanliness is next to godliness – the idea that being clean is super important. ie: You could be running a restaurant and taking shortcuts in being clean in the kitchen. You may be profitable & get away with it for a long time, maybe forever, but you never know when luck leaves you and people get sick from your food. Next thing you know, food inspectors are all over your place – shutting you down. Sick customers are suing you. You lose your money, job, business, everything – all because you were not being thorough in cleanliness.

Another example of this principle is Steve Jobs. He cared about every single detail of his products, factories & everything else. He wanted the chips inside a computer to be arranged to look good, even though no customer will ever see it. He wanted his factories & machines painted a certain way. He cared about style, design, order & cleanliness. All of this lead to products with cult like following – eventually making Apple one of the biggest companies in the world.

A similar attention to detail was used by San Francisco 49ers hall of fame head coach Bill Walsh. He came into a horrible 49ers organization – fired most coaches & staff and rebuilt it from the bottom up using his own principles. He pioneered the now famous west coast offense and ended up winning 3 super bowls. He cleansed the organization in every way and it lead to godliness = championships.

NEW BATCH:

44. You can lead a horse to water but you can’t make it drink – you can only do so much but in the end, people will do what they want.

45. Give a man a fish and you feed him for a day – teach a man to fish & you feed him a lifetime. Teach people how to do things rather than doing it for them.

46. Don’t ask the barber if you need a haircut – via Warren Buffett. Be careful who you ask for advice as salespeople’s job is to sell you on what they’re selling. I’ve made this mistake many times, asking the salesperson if he thinks what he’s selling is worth it. They’ll always say yes.

47. 10,000 Hour Rule – popularized by Malcolm Gladwell. He found that the key to success in any technical or high end field is to practice that task for 10,000 hours. He uses examples such as the Beatles, Steve Jobs, Bill Gates, etc. The Beatles spent many years playing at strip clubs for hours and hours without any breaks.

Steve Jobs & Bill Gates had access to computers at a younger age that most people in the world. Bill would sneak out of the house in the middle of the night, walk many miles just to use a computer to code.

So, if you want to get good at any high end skill (piano, stand up comedy, stock market investing, basketball, brain surgery, oscar winning actor, whatever) – expect to put in at least 10 years of practice – which usually comes out to 10,000 hrs. If you don’t love what you’re doing, you’ll usually quit – like Steve Jobs famously mentioned in his Stanford commencement speech.

48. How do you eat an elephant? – Using a fork? Cutting it into pieces using a saw? Blending it into an elephant shake & chugging it? Well the answer is you eat an elephant – one bite at a time. As cheesy as that sounds, it just means that any large task will be accomplished one step at a time. Writing a novel means writing one page at a time – or even one sentence at a time. Getting super built – one exercise session at a time. Similar to what the chinese philosopher Lao Tzu said: A journey of a 1,000 miles beings with a single step.

49. Don’t count your chickens before they hatch – When I was a realtor, I started counting all the money I would make. I had a few new buyers and one house for sale. I kept picturing all of that going through & the thousands I’d finally make. My realtor told me not to count the chickens before they hatch and I thought he was just being a hater. Well, it ended up that none of my prospects panned out and I made zero dollars. I became super disappointed & bitter when things didn’t go my way. Curtail our enthusiasm because best case scenarios seldom pass the way we expect them to. Keeping our emotions in check is important to not get too down & keep plowing forward.

50. All roads lead to rome – The roman empire was so large that all of the roads eventually led to the capital city. This just means that people usually have different methods, all of which usually lead to the same outcome. There are different diets, different workout plans, different religions, different philosophies – just know that our is not the only way to do something.

51. Law of large numbers – often referred to by Buffett & Munger. Do any task a large number of times & we can expect the average results to be close to the expected value. Casinos want you to stay & gamble for a long period of time because the house wins on average. If you win big early, just leave. Try to make more and eventually you’ll leave empty handed, if not in the negative.

As Berkshire Hathaway grows larger, it will be harder for it to outperform the average market.

Large businesses take advantage of law of large numbers – which is similar to economy of scale – because they purchase ingredients in large quantities, which results in lower costs = lower prices for the products = more customers buying their products = cycle continues.

In certain industries, large companies have a huge advantage over upstarts. UPS & FedEx have too large of a scale for a new upstart to compete well. McDonalds can buy their beef, buns, vegetables & chicken at much lower cost since they have a large distribution system in place. Coke can make soft drinks cheaper than an upstart soda maker.

52. Maslow’s hierarchy of needs – there are certain things humans need & in certain order. At the base level is our physiological needs: food, breathing, water, sex, sleep etc. If the world went to shit, we would all fight over each other over these things. Once these needs are met, we go to the next level: safety. The other levels are love/belonging, esteem, and self actualization. Knowing this helps us under ourselves as well as other people in our society. Read more here.

53. Law of diminishing returns – the idea that additional input results in a lower marginal output of an item. Doing more doesn’t result in as big of a growth anymore. Sleeping 5 hours is way better than sleeping 2 hours. After we get, let’s say 8-10hrs of sleep, another additional hour of sleep does not result in as much of a great result for our body.

Another famous example is in a car factory. Having only one employee results in slow output. Adding an additional employee will result in greater output. We can keep adding employees up to a limit, before there are way too many employees and they get in each others way, resulting in diminishing returns. Eventually this can lead to negative returns.

Watering a plant helps. After a certain point, more water doesn’t help the plant grow any more. Finally, too much water actually kills the plant.

This helps in our lives to know that doing more isn’t necessarily the answer. Read more here.

54. The map is not the territory – most commonly referred to in NLP. Our belief of reality (the map) is not the same thing as reality itself (the territory).

We can take a look at a map of chicago & get a general idea of directions, different neighborhoods, landmarks, etc. But, the map of chicago is very different than actual chicago itself. No map can ever have enough detail to fully express what the city is actually like.

Reading the best book about the benefits of travel written by the best author will never be as good as you traveling yourself. Let’s not mistake the map with the territory. Read more here.

55. Murphy’s Law – Anything that can go wrong will go wrong. Prepare for the worst. If you’re traveling by sea, prepare for the worst case scenario. If you have a computer, be prepared for the worst case scenario (it gets stolen, hard drive crashes, whatever) and you won’t be ill prepared. You can back up your data regularly to be ready. Read more here.

56. Placebo Effect – Sometimes doctors will prescribe sugar pills (with no medicinal properties) and it will seem to cure the disease as equally as medicine. Sometimes, physicians will open up a knee for surgery, do nothing & cover it back up – and the patient will improve. Scientifically, it is unknown why this happens – but the metaphysical belief is that our mind has power to cure our ailments.

This is the idea of mind over matter. We should use placebo effect for our benefit whenever possible – by controlling our thoughts & believing in best case scenarios.

P Diddy noticed that a lot of rappers who rapped about death ended up dying prematurely. So he started rapping about money, cars & women – because that’s what he wanted. Jay Z couldn’t get signed by any major record labels – so he started his own. During concerts, he would throw out real 100 bills into the crowd, even though he wasn’t rich yet – because he wanted to portray the image (to himself & to his fans) of wealth & abundance. He is of course super rich today. Read more here.

57. Observer effect – The idea in physics that observing something actually changes the thing itself. There is the famous double-slit experiment where matter can display the tendencies of a particle & a wave. When observing the matter, it will behave as a particle and go thru one of the slits. When not observing, it will behave as a particle & go thru both slits.

Does this mean the metaphysical teachings that we control our reality are true? At least at the quantum level, this seems to be somewhat true. Looking at something can change the way it behaves.

It can also mean what we consider to be reality may not actually be what it is because observing it may change the way it behaves.

58. Self-fulfilling prophecy – We have a negative mindset. Then we are always expecting to lose all our money & constantly talk about it. We look for scenarios where someone else lose money & talk about that also. Eventually, we lose all our money – confirming our belief all along. Similar to the above topics. What we believe oftentimes happens.

What beliefs do you have that you hold strongly? Are they positive or negative. If you have a negative belief, it would be in your best interest to change that to a positive one so that you can benefit from the placebo effect, observer effect & self-fulfilling prophecy.

Some famous negative beliefs are: all rich people are evil, money is the root of all evil, the government is corrupt, cops can’t be trusted, all politicians lie, I’ll never be rich, things always go wrong for me, I never win, I’m not good enough, etc. Just flip it around & convince yourself. Read more here.

59. There are three sides to every story – yours, mine & the truth. This is funnily demonstrated in sitcoms where a couple will tell their sides of the story to someone – often embellishing their qualities & playing up the other person’s flaws.

No matter how much we think we are right, we should realize that our brains/ego has a self preservation mechanism that makes us believe we are in the right more often that we really are.

If someone else is telling you their side of the story (let’s say in a marriage divorce), be careful in being swayed by one party. The truth is often something different than what each party will say.

60. Antibiotic theory – the idea that using antibiotics just results in stronger viruses & bacteria. Same thing with using pesticides which will result in stronger, more resilient pests. Better computer security results in better hackers. We can never get rid of viruses, pests or hackers. As we get stronger, the enemy gets stronger. Reason: evolution.

61. Prisoner’s dilemma – the idea that we often act in our best interests, which results in a poor outcome – even though cooperating would result in better results for both parties. Read more here.

62. Incentives – via Charlie Munger. The idea that we should look at incentives to explain why we behave the way we do. When something goes wrong for ourselves or in our society, we should look at where the incentive lies and try to change that.

People aren’t inherently good or bad, they usually work for their own self interest. And from the prisoner’s dilemma above, we can see that we often act in our own best interest even if it results in a poor outcome for us and everyone else.

Charlie’s favorite example is about Fed Ex. They have a centralized system where all packages from the country go to a central sorting location in Memphis, Tennessee. From there, packages are unloaded, sorted & reloaded into different planes to be shipped out. Since they are the leader in overnight, it’s super important for them to get this task done as fast as possible.

No matter how much management tried, they couldn’t get the employees to work hard enough to get the tasks done in time – resulting in a lot of delayed shipments. Then someone figured out a way to change the employees’ incentives. Originally, they paid their employees per hour. They changed the system to pay by the shift.

When I first read this example, I didn’t understand what the difference was. It took me a few weeks to figure it out for myself. When you pay someone by the hour – they work the whole multiple hour shift then leave. It doesn’t matter how hard or fast they work, they are paid a certain amount per hour. This is classic example of parkinson’s law (#15 above). Work fills up to take up all the time.

By paying per shift instead, employees had an incentive to work faster & harder. The quicker they finished their task, the quicker they can go home. Their pay wasn’t affected because they were paid to finish a certain task. The power of incentives!

Additional Sources:
http://robdkelly.com/blog/models-frameworks/munger-mental-models/

http://articles.businessinsider.com/2012-02-05/markets/31027332_1_charlie-munger-berkshire-hathaway-mere-mortals/2